- Weekly market update
- 5 minute read
A good week for
- The US dollar climbed c. +2% on a trade weighted basis
- Oil which gained c. +2% in dollar terms
A bad week for
- Bonds weakened, with gilts falling a further c. -2%
- Developed market equities also broadly weakened
US Consumer Price Index (CPI) rose unexpectedly in May, weighing on sentiment. The May print reached 8.6% year-on-year, while economists had forecast a decline. The surge was driven by a 3.6% month-on-month increase in energy prices, and though the core component - which excludes energy and food - did slow fractionally to 6%, inflation across the services sector was pronounced. The surprise rise puts continued pressure on the Fed to get inflation under control, despite the fact that the economy does show some signs of weakness and monetary policy will take effect with a significant lag. Fed officials meet this week and market participants had expected a 0.5% interest rate rise, though this strong CPI print has led some to speculate that a 0.75% could be possible, despite Fed chair Powell saying that such a large increment was not under consideration.
European Central Bank
At the June meeting, the ECB committed to tightening monetary policy and reiterated a newly hawkish tone on inflation. The Governing Council confirmed that net asset purchases, or QE, would come to an end on 1 July. The Bank also announced plans to begin raising its three key interest rates with a 0.25% move on 21 July followed by a further hike of possibly 0.50% instead of 0.25% on 8 September. In the wake of a spike in energy and food prices, the ECB sharply increased its inflation forecast for 2022 to 6.8%, well ahead of its 5.1% projection in March. Inflation estimates were also raised for 2023 and 2024, with inflation expected to still be 2.1% in 2024. However, despite higher inflation, growth is expected to be robust, with GDP expected to rise by 2.8% in 2022 and 2.1% in 2023. These forecasts are somewhat higher than consensus, with independent economists anticipating growth of only 1.5% in 2022. However, the ECB did not announce any “anti-fragmentation” policies to attempt to limit widening credit spreads between German bunds and other riskier peripheral nations’ debt like Italy’s.
May data further evidenced that the UK housing market is finally slowing. The Royal Institution of Chartered Surveyors released its House Price Balance survey last week, with a May reading of 73%, a 7 percentage point decline. Surveyors reported a weakening in buyer demand, which could be a result of high inflation eroding household real income and higher interest rates making borrowing more expensive. While house prices have continued to rise recently, more expensive homes have outperformed affordable properties. Buyers of less expensive homes are more likely to be negatively impacted by high energy price inflation, as seen in April.
Last week’s business surveys confirmed that China’s economy was still suffering in May. The Caixin Services Purchasing Managers’ Index came in at 41.4, higher than April’s 36.2 but far below the “50” level associated with economic expansion. China continues to battle a wave of cases of the omicron variant of covid-19. Shanghai, which had been easing restrictions, last week launched a new round of mass testing with a “stay-at-home” order over the weekend, while entertainment venues have been closed again in some Beijing districts after only a week. It is hoped that China will move away from its strict zero-covid controls by the end of the year but growth forecasts have been downgraded for 2022. Each week that social restrictions are in place makes it harder for officials to meet the 5.5% growth target set out earlier this year, with analysts expecting only 5.1% growth.
Oil prices were near a fourteen year high last week, against a backdrop of limited supply. The pandemic hit output in many oil producing countries, as production was disrupted. As social restrictions eased, demand recovered quickly, pushing prices higher. Russia’s invasion of Ukraine exacerbated this, as sanctions on Russia increased the cost of energy shipments from other exporters. Now, prices could go higher as the US summer driving season begins. China could also increase demand when it eventually exits social restrictions. World leaders are encouraging the Organisation of Petroleum Exporting Countries (OPEC) to increase production, to bring prices down, but only Saudi Arabia and the United Arab Emirates can meaningfully increase production while Russia, an OPEC ally, is said to be against a production rise.
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